12. Billions
$0.50
$0.00
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
December 2006
February 2007
April 2007
June 2007
August 2007
October 2007
December 2007
February 2008
April 2008
June 2008
ARIZONA STATE TREASURER DOUG DUCEY
August 2008
October 2008
December 2008
February 2009
April 2009
June 2009
August 2009
October 2009
December 2009
Endowment Market Value
February 2010
April 2010
June 2010
August 2010
October 2010
December 2010
ENDOWMENT MARKET VALUE
February 2011
$3.57
April 2011
Billion
June 2011
August 2011
October 2011
December 2011
February 2012
13. Millions
$600.00
$1,000.00
$1,200.00
-$200.00
$0.00
$200.00
$400.00
$800.00
December 2006
February 2007
April 2007
June 2007
August 2007
October 2007
December 2007
February 2008
April 2008
ARIZONA STATE TREASURER DOUG DUCEY
June 2008
August 2008
October 2008
December 2008
February 2009
April 2009
June 2009
August 2009
October 2009
December 2009
February 2010
April 2010
June 2010
Total Endowment Unrealized gains/losses
August 2010
October 2010
December 2010
February 2011
April 2011
ENDOWMENT UNREALIZED GAINS
June 2011
August 2011
October 2011
$960
December 2011
million
February 2012
15. ASSET ALLOCATION: MARCH 2003 - FEB 2011
50% 50%
STOCKS BONDS
ARIZONA STATE TREASURER DOUG DUCEY
16. ENDOWMENT ASSET ALLOCATION
8.8%
$3.57 Billion
Fixed Income
$1,549.4 million
$542.2 million
15.3% $1,600.04M
40.2%
$502.79M
S&P 500
S&P 400
35.7% $1,122.1 million
$1,052.42M
S&P 600
As of 3/31/2012
ARIZONA STATE TREASURER DOUG DUCEY
19. CURRENT DISTRIBUTION FORMULA
FY 2008 AVG. TOTAL RETURN FY 2008 AVG. TOTAL INFLATION
+ +
FY 2009 AVG. TOTAL RETURN FY 2009 AVG. TOTAL INFLATION
+ +
FY 2010 AVG. TOTAL RETURN FY 2010 AVG. TOTAL INFLATION
+ +
FY 2011 AVG. TOTAL RETURN 20% FY 2011 AVG. TOTAL INFLATION 20%
+ +
FY 2012 AVG. TOTAL RETURN FY 2012 AVG. TOTAL INFLATION
FY 2008 MARKET VALUE
+
FY 2009 MARKET VALUE
+
FY 2010 MARKET VALUE
+
FY 2011 MARKET VALUE
+
20%
FY 2012 MARKET VALUE
ANNUAL DISTRIBUTION
ARIZONA STATE TREASURER DOUG DUCEY
20. SMOOTHER, CONSISTENT DISTRIBUTIONS
5-Year
Average
Market Value
X
2.5%
Annual
Distribution
Takes 2.5% of the average monthly market value from
each of the previous five years
ARIZONA STATE TREASURER DOUG DUCEY
22. MODERATE MARKET SCENARIO
1,200
Current, Complicated Formula New, Simple Formula
1,000
Annual Distribution ($ Millions)
800
600
Years with $0 Distribution Using Current Formula
400
200
0
ARIZONA STATE TREASURER DOUG DUCEY
23. OPTIMISTIC MARKET SCENARIO
1,200
Current, Complicated Formula New, Simple Formula
1,000
$0
Annual Distribution ($ Millions)
Years with Distribution Using Current Formula
800
600
400
200
0
ARIZONA STATE TREASURER DOUG DUCEY
24. PESSIMISTIC MARKET SCENARIO
1,200
Current, Complicated Formula New, Simple Formula
1,000
Annual Distribution ($ Millions)
800
600
Years with $0 Distribution Using Current Formula
400
200
0
ARIZONA STATE TREASURER DOUG DUCEY
26. STATE CASH FLOW
TOTAL OPERATING ACCOUNT AVERAGE MONTHLY BALANCE
$3,000
Up 50% in First 9 months YOY
Dec'07-June '09
Recession
$2,500 Mar'01-Nov '01
Recession
$2,000
$1.37 billion
in March
$1,500
Jul '90-Mar '91
$1,000 Recession
$500
Millions
$0
-$500
-$1,000
ARIZONA STATE TREASURER DOUG DUCEY
32. Key Economic Measures
- Current Arizona Status
Withholding Growth 2.6%
3 Month Average Compared to Prior Year
Retail Sales Tax Growth
5.1%
3 Month Average Compared to Prior Year
Pending Maricopa Foreclosures 17,800
Arizona Single Family Permits 11,400
Arizona Underwater Mortgages 48%
32
JLBC
33. Arizona Forecasters Are Optimistic Compared
to Other Western States
Blue Chip Forecast - % Personal Income Growth
CY 2012 CY 2013
Texas 5.1% Arizona 5.8%
Arizona 4.9% Utah 5.8%
Utah 4.8% Texas 5.4%
Washington 4.5% Washington 5.2%
Wyoming 4.5% Colorado 4.7%
Colorado 4.4% Oregon 4.4%
Oregon 4.4% California 4.1%
California 4.0% Idaho 3.8%
New Mexico 3.3% Nevada 3.2%
Idaho 2.8% New Mexico 3.4%
Nevada 2.4% Wyoming N/A
33
JLBC
34. Where Are We Headed Over the Next Few Years?
- Four-Sector Consensus Forecast Incorporates
Different Economic Views, Including the FAC
4-sector forecast equally weights:
JLBC UA - Low
FAC average 25% 25%
UofA model – base
UofA model – low
JLBC Staff forecast
Remaining revenues (10% of
total) are staff forecast
FAC UA - Base
Consensus 25%
25%
* Includes Big 3 categories of sales tax,
individual income and corporate income taxes 34
JLBC
35. Sales Tax
- The Consensus Forecasts Growth of 5.8% in FY ’12
and 4.2% in FY ’13
15%
Y/Y Change (without 1-Cent Tax)
10% 7.5%
5.8% 5.5%
5.6% 4.2%
5% 1.8%
0%
-3.5%
-5%
-10% ’11 Actual = $3.45 Billion
-10.0%
-13.7%
-15%
’12 YTD = 5.1%
-20%
'07 '08 '09 '10 '11 '12 '13 '14 '15
Fiscal Year
Historical 4-Sector Forecast
Percent Change in Base Revenue Excluding
35
JLBC Tax Law Changes and 1-Cent Sales Tax
36. Sales Tax Growth Rate Has Slowed
Throughout Year
- Comparison to FY ’11 Helps Explain FY ’12 Path
10%
FY 2011 FY
6.9% 2012
% Growth From Prior Yr
6.3%
4.8%
5%
3.6%
2.4%
2.0%
0%
-2.8%
-5%
1st 2nd 3rd 4th 1st 2nd 3rd
Collections by Quarter
36
JLBC
37. June 2013 TPT Estimated Payment
Businesses with an annual sales tax liability above a certain
threshold are required make a single estimated advance
payment in June of each year
Legislature lowered liability threshold for estimated
payment from $1 million to $100,000 for FY ‘10 thru FY ‘12
The reduced liability threshold generated a one-time
revenue gain of $48 million in FY ‘10
When threshold reverts to $1 million in FY ‘13, state will
incur an estimated one-time revenue loss of $(52) million
37
JLBC
38. Individual Income Tax
- The Consensus Forecasts Growth of 6.2% in FY ’12
Dropping to 2.9% in FY ’13
20%
18.0%
10% 6.3% 6.2% 6.5%
5.5%
2.9%
Y/Y Change
0%
-4.1%
-10% -5.5%
’11 Actual = $2.86 Billion
-20%
-24.5% ’12 YTD = 7.2%
-30%
'07 '08 '09 '10 '11 '12 '13 '14 '15
Fiscal Year
Historical 4-Sector Forecast
Percent Change in Base Revenue Excluding
Tax Law and One-Time Changes 38
JLBC
39. Components of Individual Income Tax Growth
- First Three Quarters of FY ’12
Growth appears to be in line
with job and wage growth
Withholding 3.1%
Payment increase overstated
Payments 29.5% due to large one-time
payment in January – absent
Refunds 4.5% this payment, growth would
be 12.3%
Net 7.2% Refunds appear to be on
track for first increase since
FY ‘09
39
JLBC
40. Corporate Income Tax
- The Consensus Forecasts Growth of 14.0% in FY ’12
Dropping to 3.9% in FY ’13
50%
38.2%
25% 14.1% 14.0% 14.8%
9.3%
Y/Y Change
3.9%
0%
-25% -14.4% ’11 Actual = $560.2 Million
-20.7%
-24.6%
’12 YTD = 33.6%
-50%
'07 '08 '09 '10 '11 '12 '13 '14 '15
Fiscal Year
Historical 4-Sector Forecast
Percent Change in Base Revenue Excluding
Tax Law and One-Time Changes 40
JLBC
41. Corporate Income Tax
- Forecast Remains Substantially Below FY ’07 High Point
1,200
$986
1,000
$874
$785
800
$711
$681
$ in Millions
$632 $636
$592
600 $560
$413
400
200
0
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
4-Sector Forecast
Total dollar collections include enacted tax law changes and one-time adjustments. 41
JLBC
42. Consensus Predicts Base Growth Rate of
5.6% in FY ’12 *
10%
FY ’12 YTD collections:
8.2%
8% 7.3% • 6.7% greater than FY
6.6%
’11 collections
6%
4.5% • $17 million or 0.3%
4% over the January
Baseline forecast
2%
0%
UA Base UA Low FAC JLBC
Details in Appendix A
* Weighted Big 3 average growth prior to 1-Cent sales tax is 6.6% in FY ’12 . After adjusting for small tax
categories, the base growth rate is 5.6% in FY ’12.
42
JLBC
43. Consensus Predicts Base Growth Rate Declining from
5.6% in FY ’12 to 3.4% in FY ’13*
FY ’12 FY ’13
10%
8.2%
8% 7.3%
6.9%
6.6%
5.6%
6%
4.5% 4.4%
4%
2%
0%
-2%
-2.5%
-4%
UA Base UA Low FAC JLBC UA Base UA Low FAC JLBC
Details in Appendix A
* Weighted Big 3 average growth prior to 1-Cent sales tax is 6.6% in FY ’12 and 3.6% in FY ’13. After 43
JLBC adjusting for small tax categories, the base growth rate is 5.6% in FY ’12 and 3.4% in FY ’13.
44. FY ’13 4-Sector Forecast
- April Components Compared to January
10%
7.6% 7.8%
8% 6.9%
6% 5.6%
5.0%
4.4%
4%
2% 1.4%
0%
-2%
-2.5%
-4%
UA Base UA Low FAC JLBC
January April
44
JLBC
45. Consensus Forecasts Steadily Rising Revenue
Growth Rate Through FY ’15
30%
20.1%
18.1%
Year over Year Percent Change
20%
9.4% 10.1%
6.9% 7.2%
10% 5.6% 6.3%
3.4%
0%
-10% -4.6%
-10.3%
-20%
-18.2%
-30%
FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15
Percent Change in Base revenues excluding balance forward, tax law changes, one-
time revenues, and urban revenue sharing 45
JLBC
46. Two Potential Issues With 4-Sector
1) 3.4% FY ’13 projection reflects slower
average growth than many general economic
projections
2) 4-Sector growth rates accelerate in out-years
– budget forecasts usually become more
cautious in the long run
46
JLBC
47. An Alternate Scenario Assumes 5% Annual Growth
through FY ’15
- In the FY ’12-’15 Cycle, Produces Total Revenue Comparable to 4-Sector
10%
Year over Year Percent Change
8% 7.2%
6.3%
6% 5.6%
5.0%
5.0% 5.0%
4%
3.4%
2%
0%
FY 12 FY 13 FY 14 FY 15
Percent Change in Base revenues excluding balance forward, tax law changes, one-
time revenues, and urban revenue sharing 47
JLBC
48. Comparison of Revenue Forecasts
- Base General Fund Percentage Revenue Growth
FY ‘12 FY ‘13 FY ‘14 FY ‘15
January 4-Sector 5.3% 5.1% 6.9% 7.9%
April 4-Sector 5.6% 3.4% 6.3% 7.2%
April – Alternate 5.6% 5.0% 5.0% 5.0%
Executive 1/ 5.3% 6.5% 7.3% 6.4%
-The April estimate has slow FY ’13 growth, followed by accelerating economy in FY ’14 and FY ’15.
-- The FY ’13 4-sector may be too low and out-year budgets are not usually based on accelerating
growth.
-- The Alternative scenario produces a comparable amount of revenue to the April 4-sector.
1/ Stated relative to January FAC prior year estimate for comparability.
48
JLBC
49. Consensus Forecast Remains Below FY ’07 High
12
9.62
10 9.26
8.76 8.59 8.75 8.80
8.28
7.72 8.05
8
6.97
$ in Billions
6.29
6
4
2
0
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Base 1 ¢ Sales Tax
Excludes balance forward and other one-time revenues. Includes tax law
changes and Urban Revenue Sharing.
49
JLBC
50. Risks to the Economic Forecasts
Impact of international economy uncertain
• Difficult to predict outcome, leading some national
forecasters to place recession risk at 20%
Cannot predict natural disasters or political events
ahead of time
• Iran and Israel
• Gasoline prices
Effect of future federal tax and spending decisions
50
JLBC
52. Baseline Revision in Long Term Spending Estimates
- Relative to Appropriation Committee Estimates
Federal Health Care cost has been re-estimated from
$421 M to $210 M in FY ‘15
• Reflects further analysis of Executive’s $421 M estimate
• Assumes childless adult enrollment returns to pre-freeze
levels plus 50% participation of currently eligible but not
participating individuals
FY ’15 New School construction costs projections have
declined from $150 M to $56 M
• Reflects reduction in SFB’s projection of new school openings
See Attachment B for more details
52
JLBC
53. FY ’12 – ’15 Projections
The projections include the April 4-sector revenue estimates and the
spending plan approved by the Appropriations Committee in February
The ending balance estimates are affected by whether the prior year
budget has a surplus or shortfall
’12 ’13 ’14 ’15
Revenues $8.7 B $8.5 B $8.3 B $8.8 B
Spending $8.5 B $8.5 B $8.7 B $9.2 B
Balance $187 M $ 80 M $(402) M $(410) M
(W/O Carryforward)
Balance $187 M $267 M $(134) M $(545) M
(W/Carryforward)
53
JLBC
54. Change in Ending Balance Projections
The lower April 4-sector revenue estimates would lower the projected FY ’13
ending balance and increase the FY ’15 shortfall
’12 ’13 ’14 ’15
Balance with
$137 M $303 M $ 69 M $(380) M
January Revenue
Balance with
$187 M $267 M $(134) M $(545) M
April Revenue
Includes carryforward from prior year
54
JLBC
56. The Caveats
New permanent initiatives would reduce the FY ‘13
balance and increase the FY ’14 and FY ’15 shortfalls
A 3-Year budget forecast is inherently unreliable
• A 2% error could change revenues by $500 M in the
3rd year
Serious federal deficit reduction could increase
state costs
Pending Supreme Court decision on federal health
care and other state “budget” lawsuits could affect
long term costs
56
JLBC
57. Appendix A: April 2012 4-Sector Forecast
FY 2012 FY 2013 FY 2014 FY 2015
Sales Tax
JLBC Forecast 5.7% 5.2% 6.8% 7.2%
UA – Low 5.2% 0.2% 3.7% 8.1%
UA – Base 7.0% 4.5% 6.3% 8.7%
FAC 5.4% 6.7% 5.1% 6.1%
Average: 5.8% 4.2% 5.5% 7.5%
Individual Income Tax
JLBC Forecast 5.8% 6.4% 7.0% 7.0%
UA – Low 4.2% -4.9% 3.9% 6.0%
UA – Base 9.6% 3.9% 5.6% 6.8%
FAC 5.1% 6.2% 5.2% 5.9%
Average: 6.2% 2.9% 5.5% 6.5%
Corporate Income Tax
JLBC Forecast 25.0% 3.7% 4.8% 3.0%
UA – Low 1.2% -7.4% 22.5% 15.9%
UA – Base 8.5% 6.8% 24.5% 13.5%
FAC 21.1% 11.0% 10.8% 6.0%
Average: 14.0% 3.9% 14.8% 9.3%
JLBC Weighted Average: 7.3% 5.6% 6.7% 6.8%
UA Low Weighted Average 4.5% -2.5% 5.1% 7.9%
UA Base Weighted Average 8.2% 4.4% 7.5% 8.3%
FAC Weighted Average: 6.6% 6.9% 5.7% 6.0%
“Big-3” Weighted Average 6.6% 3.6% 6.3% 7.2%
Consensus Weighted Average:* 5.6% 3.4% 6.3% 7.2%
Adjusted Consensus Weighted Average:** 5.6% 2.9% 6.0% 6.0%
* Consensus Big-3 Categories adjusted for small revenue categories 57
JLBC ** Consensus Weighted Average adjusted for tax law changes
58. Appendix B: Summary of Baseline Spending Adjustments
The budget proposal heard in the House and Senate Appropriations Committees originally assumed an FY 2015 shortfall of $(675)
million. This shortfall estimate included $421 million for costs associated with federal healthcare requirements and $150 for School
Facilities Board new construction costs.
Based on further analysis of these issues, the estimate of federal healthcare requirement costs has been reduced to $210 million, while
the SFB cost projection has been reduced to $56 million.
The following summary provides further detail of these estimates.
AHCCCS
FY 14 Federal Health Care Projection - $40M
Program starts in January 2014.
New enrollees include:
o Newly eligible – Any person with income from 100 to 133% FPL.
o Currently eligible – Any person with income from 0 to 100% FPL, who is not a childless adult. Publicity of federal
health care is expected to encourage some of these already eligible people to enroll.
o Previously eligible childless adults – An adult without children 18 years and younger who has income from 0 to 100%
FPL.
165,000 new enrollees in Medicaid in FY 14 as a result of federal health care changes, about half of the total expected to
ultimately enroll.
o 40,000 (35%) of the newly eligible.
o 65,000 (25%) of the currently eligible.
o 60,000 (50%) of the previously eligible childless adults from 0 to 100%.
The federal government covers 100% of costs for the newly eligible, 65% for the currently eligible, and 82% for restored childless
adults.
58
JLBC
59. Appendix B (continued)
A partially offsetting savings is realized from the enhanced federal match of 82% (up from 65%) for 120,000 still enrolled
childless adults.
Capitation rates increase 5% in FY 14.
FY 15 Federal Health Care Projection - $210M
First full year of implementation.
The remaining portion of expected enrollees comes onto Medicaid, resulting in a total of 325,000 new enrollees from federal
health care changes.
o 75,000 (70%) of the newly eligible.
o 135,000 (50%) of the currently eligible.
o 115,000 (100%) of the previously eligible childless adults from 0 to 100% FPL.
The federal match for previously eligible childless adults increases from 82 to 85% of costs.
A partially offsetting savings is realized from the enhanced federal match of 85% for 120,000 still enrolled childless adults.
Capitation rates increase 5% in FY 15.
School Facilities Board
FY 15 New School Construction Projection - $56 M
Estimate based on projects requested by the School Facilities Board in FY 2013 budget request.
Eliminates projects which have been cancelled due to lower than expected enrollment forecasts.
Cost estimate incorporates all new construction projects scheduled to open through FY 16. Assumes entire funding amount is
appropriated in FY 15.
59
JLBC
61. Contents
Slide:
3……Total Non-Farm Employment
4……Initial Claims for Unemployment Insurance
5……State Sales Tax Collections – Retail Category
6……State Sales Tax Collections – Contracting
Category
7……Single Family Building Permits
8……Maricopa County Pending Foreclosures
9……Coincident Index
61
JLBC
62. Total Non-Farm Employment
2,800
2,700
2,600
Thousands of Jobs
2,500
2,400
2,300
2,200
2,100
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
62
JLBC Not seasonally adjusted
63. Initial Claims for Unemployment Insurance
45,000
40,000
Total Monthly Claims for UI Benefits
35,000
30,000
25,000
20,000
15,000
10,000
5,000
AUG
AUG
MAY
MAY
APR
MAR
APR
MAR
FEB
FEB
OCT
OCT
JAN
JUN
JAN
JUN
JAN
JUN
NOV
NOV
NOV
JUL
JUL
SEP
SEP
DEC
DEC
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
63
JLBC Not seasonally adjusted
64. JLBC
$ in Millions
$100
$125
$150
$175
$200
$225
July 06
Oct 06
Jan 07
Apr 07
July 07
Oct 07
Jan 08
Apr 08
July 08
Oct 08
Jan 09
Apr 09
July 09
Oct 09
Excludes temporary 1 ¢ sales tax
Jan 10
Apr 10
July 10
Oct 10
Jan 11
Apr 11
July 11
Oct 11
Jan 12
State Sales Tax Collections – Retail Category
64
65. JLBC
$ in Millions
$100
$0
$25
$50
$75
July 06
Oct 06
Jan 07
Apr 07
July 07
Oct 07
Jan 08
Apr 08
July 08
Oct 08
Jan 09
Apr 09
July 09
Oct 09
Excludes temporary 1 ¢ sales tax
Jan 10
Apr 10
July 10
Oct 10
Jan 11
Apr 11
July 11
Oct 11
Jan 12
65
State Sales Tax Collections – Contracting Category
66. Single Family Building Permits
100,000
90,000
80,000
Single Family Building Permits
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
66
JLBC 12-Month Moving Sum
67. Maricopa County Pending Foreclosures
60,000
50,000
40,000
30,000
20,000
10,000
0
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
67
JLBC An initial notice of trustee sale has been recorded but final sale has not yet occurred
68. Economic Activity Index
210
200
Coincident Index Value
190
180
170
160
150
140
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JAN
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
JUL
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Coincident Index – Federal Reserve Bank of Philadelphia. Combines four state-level indicators 68
JLBC (employment, average hours worked in manufacturing, the unemployment rate, and wage and salary
disbursements) to summarize current economic conditions.